zero hedge - on a long enough timeline, the survival rate for everyone drops to zero Wed 2010-08-25 10:47 EDT

Illinois Teachers' Retirement System Enters The Death Spiral: AIG Wannabe's Go-For-Broke Strategy Fails As Pension Fund Begins Liquidations

Two few months ago we disclosed how the Illinois Teachers' Retirement System (TRS) was doing all it can to become the next AIG. In addition to, or maybe precisely due to, its deplorable fundamental condition, which can be summarized as being 61% underfunded on its $33.7 billion in assets, with a performance record of down $4.4 billion in 2009 and 5% in 2008, the fund, courtesy of a detailed analysis by Alexandra Harris of the Medill Journalism school at Northwestern, was found to be on its way to trying to become a veritable self-made TBTF: as was described then, "TRS is largely on the risky side of the contracts, selling and writing OTC derivatives, including credit default swaps,..."

AIG Wannabe's Go; Broke Strategy Fails; Death Spiral; dropped; Illinois teacher; long; Pension Fund Begins Liquidations; Retirement System Enters; survival rate; Timeline; zero; Zero Hedge.

Wed 2010-08-25 08:41 EDT

2008 Bailout Counter-Factual | The Big Picture

Barry Ritholtz

...My disagreement with the Zandi-Blinder report is not its theoretical underpinnings -- it is by definition a hypothetical counter-factual. Rather, it is the counter-factual Blinder/Zandi chose to use: ``What would the economy look like now if we had done nothing?'' Instead, I propose a better counter-factual: ``What if we had done the right thing, instead of nothing -- or the wrong thing?''...In my counter factual, the bailouts did not occur. Instead of the Japanese model, the US government went the Swedish route of banking crises: They stepped in with temporary nationalizations, prepackaged bankruptcies, and financial reorganizations; banks write down all of their bad debt, they sell off the paper. In the end, the goal is to spin out clean, well financed, toxic-asset-free banks into the public markets...One by one, we should have put each insolvent bank into receivership, cleaned up the balance sheer, sold off the bad debts for 15-50 cents on the dollar, fired the management, wiped out the shareholders, and spun out the proceeds, with the bondholders taking the haircut, and the taxpayers on the hook for precisely zero dollars. Citi, Bank of America, Wamu, Wachovia, Countrywide, Lehman, Merrill, Morgan, etc. all of them should have been handled this way...

2008 Bailout Counter-Factual; Big Picture.

zero hedge - on a long enough timeline, the survival rate for everyone drops to zero Fri 2010-07-30 15:41 EDT

China Has Been Covertly Funding A Housing Bubble Five Times Larger Than That Of The US: 65 Million Vacant Homes Uncovered

...a report [Fitch] released today titled Informal Securitisation Increasingly Distorting Credit Data, uncovers that China has in fact been massively underrepresenting the actual amount of new loans in the first half of 2010, courtesy of precisely the kinds of securitization deals that blew up half of our own banking system... [moreover, Yi Xianrong,] an economist at the Chinese Academy of Social Sciences noted estimates from electricity meter readings that there are about 64.5 million empty apartments and houses in urban areas of the country... China's banks are increasingly becoming more opaque in data presentation, which one can assume is due to their unwillingness to reveal the true state of affairs... [According to] Xianrong ``investment in the domestic property market has completely overturned China's traditional concepts of wealth management and investment and its price formation system'' [Chinese real estate bubble]

65; China; covert funding; dropped; housing bubble; long; survival rate; Time larger; Timeline; Vacant Homes Uncovered; zero; Zero Hedge.

Wed 2010-06-09 18:56 EDT

Rajiv Sethi: The New Market Makers

...the SEC's preliminary report on the flash crash...led me to believe that most of this activity was caused by algorithmic trading strategies placing directional bets based on rapid responses to incoming market data. Two strategies in particular -- momentum ignition and order anticipation -- were explicitly mentioned as potentially destabilizing forces in the SEC's January Concept Release on Equity Market Structure. The SEC invited comments on the release, and dozens of these have been posted to date. There is one in particular, submitted by R.T. Leuchtkafer about three weeks before the crash, that I think is especially informative and analytically compelling...Leuchtkafer traces the history of recent changes in market microstructure and examines the resulting implications for the timing of liquidity demand and supply...The standard argument against increased regulation of the new market makers is that it would interfere with their ability to supply liquidity. Leuchtkafer argues, instead, that the strategies used by these firms cause them to demand liquidity at precisely those moments when liquidity is shortest supply...

New Market Makers; Rajiv Sethi.

Tue 2010-06-01 18:24 EDT

billy blog >> Blog Archive >> In the spirit of debate ... my reply Part 2

Bill Mitchell

Today, I offer Part 2 of my responses to the comments raised in the debate so far...Modern monetary theory does not use the term ``money'' in the same way as the mainstream because it creates instant confusion. As Scott said ``Money is always someone's liability, so better to be precise about whose liabilities we are talking about than saying money.'' That is why we emphasis fully understanding the asset-liability matches that occur in monetary systems. And that leads you to realise that transactions between government and non-government create or destroy net financial assets denominated in the currency of issue whereas transactions within the non-government sector cannot create net financial positions...So modern monetary theorists prefer to concentrate on what is going on with balance sheets after certain flows have occured rather than narrowly defining some financial assets as money and others not...There is no doubt that the non-government institutions can increase credit. Some slack analysts call this an increase in money. But the accurate statement is that, as a matter of accounting it increases the (in Scott's words) ``the quantity of financial assets and financial liabilities 1 for 1 in the non-govt sector. So, with private credit, there is BY DEFINITION no NET increase in private sector financial assets created.'' Once we understand that and note that typically the non-government sector seeks to net save in the currency of issue then modern monetary theory tells you that the public sector must run a deficit to underwrite this desired net saving or else see an output gap widen...Who is in control is an interesting question. Clearly, the government cannot directly control the money supply which renders much of the analysis in mainstream macroeconomics textbooks as being irrelevant. The Monetarists via Milton Friedman persuaded central banks to adopt monetary targetting in the 1980s and it failed a few years later -- miserably...Then you might like to consider it from the other angle -- a government which accepts responsibility for full employment can ``finance'' the saving desires of the non-government sector by increasing its deficit up to the level warranted by the spending gap (left by the full employment non-government savings)...Orthodox macroeconomic theory struggles with the idea of involuntary unemployment and typically tries to fudge the explanation by appealing to market rigidities (typically nominal wage inflexibility). However, in general, the orthodox framework cannot convincingly explain systemic constraints that comprehensively negate individual volition. The modern monetary framework clearly explicates how involuntary unemployment arises. The private sector, in aggregate, may desire to spend less of the monetary unit of account than it earns. In this case, if this gap in spending is not met by government, then unemployment will occur. Nominal (or real) wage cuts per se do not clear the labour market, unless they somehow eliminate the private sector desire to net save and increase spending...to maintain high levels of employment and given that the public generally desire to hold some reserves of fiat money, the government balance will normally have to be in deficit...modern monetary theory demonstrates that if you want the non-government sector to net save...

Billy Blog; blogs Archive; Debate; reply Part 2; Spirit.

Sat 2010-05-22 20:28 EDT

New Economic Perspectives: What If the Government Just Prints Money?

Scott Fullwiler

As Congress gets set in the near future to consider raising the debt ceiling yet again, my fellow blogger L. Randall Wray creatively suggests not raising the debt ceiling but instead having the Treasury continue spending as it always does: by simply crediting bank accounts...Wray's proposal is based upon modern monetary theory (MMT) that is the focus this blog and those by Bill Mitchell, Warren Mosler, and Winterspeak. Of course, given the lack of understanding of basic reserve accounting at the heart of MMT and Wray's proposal on the part of the public, the financial press, and the vast majority of economists, one can already anticipate the outpouring of criticism suggesting that such a proposal amounts to ``printing money'' and thereby destroying the value of the currency...The approach here recognizes the importance of understanding the balance sheet implications of both of these options that are central to MMT. While most economists typically assume a supply and demand relationship, as in the hypothesized loanable funds market, and then build models accordingly, such an approach can miss important relationships in the real world...Both the Treasury's bond sales and the Fed's operations affect only the relative quantities of securities, reserve balances, and currency held by the non-government sector; the total sum of these is set by the outstanding government debt. With or without bond sales, it is the non-government sector's decision to spend or save that matters in regard to the potential inflationary impact of a given government deficit. Indeed, to be more precise, a deficit accompanied by bond sales is actually the MORE potentially inflationary option, as the net financial assets created by the deficit will be increased still further when additional debt service is paid.

Government Just Prints Money; New Economic Perspectives.

zero hedge Sat 2010-05-22 13:41 EDT

Albert Edwards: Europe Is On The Edge Of A Deflationary Precipice That Will, Paradoxically, Usher In 20-30% Inflation

A few days ago we pointed out that the latest Japanese GDP deflator came at multi-decade lows, this despite years of printing, pumping and other -ings. Today, Albert Edwards takes the observation of rampant regional deflation and concludes precisely what we have long claimed, that once rampant deflation is finally acknowledged by central bankers everywhere, and they are now running out for time, their only natural response to preserve the system will be to do what Japan has been doing for decades (successfully, they will claim) and respond with the most extreme round of monetization ever seen, "inevitably driving us towards out ultimate destination - 1970's style 20-30% inflation."...

20 30; Albert Edwards; deflationary precipice; edge; Europe; Inflation; paradox; usher; Zero Hedge.

zero hedge Sun 2010-05-09 09:45 EDT

The Day The Market Almost Died (Courtesy Of High Frequency Trading)

A year ago, before anyone aside from a hundred or so people had ever heard the words High Frequency Trading, Flash orders, Predatory algorithms, Sigma X, Sonar, Market topology, Liquidity providers, Supplementary Liquidity Providers, and many variations on these, Zero Hedge embarked upon a path to warn and hopefully prevent a full-blown market meltdown. On April 10, 2009, in a piece titled "The Incredibly Shrinking Market Liquidity, Or The Black Swan Of Black Swans" we cautioned "what happens in a world where the very core of the capital markets system is gradually deleveraging to a point where maintaining a liquid and orderly market becomes impossible: large swings on low volume, massive bid-offer spreads, huge trading costs, inability to clear and numerous failed trades. When the quant deleveraging finally catches up with the market, the consequences will likely be unprecedented, with dramatic dislocations leading the market both higher and lower on record volatility." Today, after over a year of seemingly ceaseless heckling and jeering by numerous self-proclaimed experts and industry lobbyists, we are vindicated...absent the last minute intervention of still unknown powers, the market, for all intents and purposes, broke. Liquidity disappeared. What happened today was no fat finger, it was no panic selling by one major account: it was simply the impact of everyone in the HFT community going from port to starboard on the boat, at precisely the same time...It is time for the SEC to do its job and not only ban flash trading as it said it would almost a year ago, but get rid of all the predatory aspects of high frequency trading, which are pretty much all of them...HFT killed over 12 months of hard fought propaganda by the likes of CNBC which has valiantly tried to restore faith in our broken capital markets. They have now failed in that task too. After today investors will have little if any faith left in the US stocks, assuming they had any to begin with. We need to purge the equity market structure of all liquidity-taking parasitic players. We must start today with High Frequency Trading...

courtesy; day; dies; high frequency trade; Market; Zero Hedge.

zero hedge Tue 2010-03-09 17:59 EST

Is The Federal Reserve Insolvent?

...For a refined analysis of what would happen in that moment of clarity when the world realizes the world's biggest bank is broke, we turn to a presentation by Chris Sims, given before Princeton University, titled "Fiscal/Monetary Coordination When The Anchor Cable Has Snapped."...discusses precisely the issues were are faced with today: namely a monetary policy that has run amok, seignorage, exploding excess reserves, the impact of these on "power money", and, in general, a Fed balance sheet that is increasingly reminiscent of a drunk, rapid and schizophrenic bull in a China store...the only way to deal with a mark-to-market of the Fed currently is to embrace monetization. It is no longer a question of semantics, of who promised what: it is the only mechanical way by which the Fed can dig itself out of a capital deficiency. With GSE delinquencies exploding, and with the Fed (and Congress) singlehandedly facilitating imprudent lender policy by allowing ever more borrowers to become deliquent without consequences, the MBS delinquency rate will likely hit 10% over the next 6-12 months. At that moment, someone will ask the Fed: "what is the true basis of your capital account?" And when the Fed is forced to justify a valid response, is when monetizaton will begin...

Federal Reserve Insolvent; Zero Hedge.

Debtor's prison Mon 2009-12-21 20:17 EST

Transitioning to a Global Credit Regime Part I

MAAA

...this is the first in a series of posts that will aim to discuss and dissect the more likely nature, features and requirements of the global monetary and debt system that will emerge once the current one disintegrates. To be clear, we define the current system as consisting of fiat sovereign currencies collaterized by sovereign (and now private) debt, primarily from the US. It is precisely this system that we have come to believe is unsustainable and will eventually crash in what many people call the Dollar Event Horizon (DEH). What emerges after DEH must therefore not be of a sovereign nature, but of a global one; of that we are certain.

Debtor s Prison; Global Credit Regime Part; transition.

zero hedge Sat 2009-10-10 11:57 EDT

The Federal Reserve's Balance Sheet: An Update

Ben S. Bernanke

...the Federal Reserve has faced two historically unusual constraints on policy. First, the financial crisis, by increasing credit risk spreads and inhibiting normal flows of financing and credit extension, has likely reduced the degree of monetary accommodation associated with any given level of the federal funds rate target, perhaps significantly. Second, since December, the targeted funds rate has been effectively at its zero lower bound (more precisely, in a range between 0 and 25 basis points), eliminating the possibility of further stimulating the economy through cuts in the target rate. To provide additional support to the economy despite these limits on traditional monetary policy, the Federal Open Market Committee (FOMC) and the Board of Governors have taken a number of actions and initiated a series of new programs that have increased the size and changed the composition of the Federal Reserve's balance sheet. I thought it would be useful this evening to review for you the most important elements of the Federal Reserve's balance sheet, as well as some aspects of their evolution over time. As you'll see, doing so provides a convenient means of explaining the steps the Federal Reserve has taken, beyond conventional interest rate reductions, to mitigate the financial crisis and the recession, as well as how those actions will be reversed as the economy recovers...

Federal Reserve's balance sheet; Update; Zero Hedge.

zero hedge Wed 2009-09-02 20:01 EDT

Money On The Sidelines... 1930 Versus 2009

There is a saying, that everything new is just well-forgotten old. The same apparently is especially applicable to propaganda that seeks to part fools with their money. Today's brownie point question is: was the statement below just uttered by Larry Kudlow, or did it appear first more than 79 years ago? There's a large amount of money on sidelines waiting for investment opportunities; this should be felt in market when ``cheerful sentiment is more firmly intrenched.'' Economists point out that banks and insurance companies ``never before had so much money lying idle.'' If you answered "the latter" you were correct. It first appeared on August 28, 1930 to be precise (and who knows how many times prior...

1930 Versus 2009; money; sidelined; Zero Hedge.

Tue 2009-04-21 00:00 EDT

Interfluidity :: When did the crisis begin?

``the crisis that we're in now is precisely the same crisis we've been in since at least the S&L crisis. We've had a cancer, with some superficial remissions, but fundamentally, for the entire period from the 1980s to 2008, our financial system in general and our banks in particular have been broken.''

crisis begin; Interfluidity.

Fri 2009-01-16 00:00 EST

naked capitalism: Some Cautionary Observations from Marc Faber

``Everybody seems to think that, thanks to the government's monetary and fiscal interventions, this recession will come nowhere near the 1930s slump. However, I think it might be far worse and precisely because of the interventions.''

Cautionary Observations; Marc Faber; naked capitalism.